How to Set Up Health Insurance Benefits for Your Startup
When starting a company, something you will need to determine is what kind of health insurance you want to offer your employees. In the U.S., most full-time employees expect to receive health insurance benefits from their employer. For employers, not only is it a good way to attract top talent, but as you grow you will eventually be required to offer it. Under the Affordable Care Act, companies with over 50 employees must provide health insurance, which is a part of the legislation known as the “Employer Mandate."
But what exactly are health benefits? They are a range of healthcare services that are covered by an insurance plan, including the cost of most doctors’ services, emergency hospital care, prescription drug coverage and pregnancy and childbirth care.
In order to set up benefits insurance for your employees, you will need to make decisions in the following key areas:
- What broker or form of broker to use to purchase employee health insurance plans?
- What health insurance plan(s) to offer?
- What additional types of insurance to offer?
- How much of the insurance premium will your company cover on behalf of employees?
- How much of the insurance premium for dependents (children, spouses, domestic partners) will your company cover on behalf of employees?
Selecting a Benefits Insurance Broker or Equivalent
The two things to consider when selecting a broker are 1) convenience and 2) their ability to give advice. Price does not need to be a decision factor since most startups classify as “small group” (under 50 employees, 100 in some states) and insurance plans are required to charge the same premiums to these groups under the Affordable Care Act.
If you seek convenience, the best option is to get benefits for your employees directly through your payroll provider, as they already have the data on your employees, know when new ones are onboarded, and allow you to manage health insurance and payroll in one system (read more about setting up your payroll provider here). If you have a lot of questions about how benefits work or you need guidance and consultation in selecting health plans, using a traditional broker may make more sense. If you are going to use a broker, it is best to get a referral from a friend or investor. Sequoia Benefits is one broker that specializes in startups.
Note that many insurance plans will not sell directly to small groups, and if you purchase through an online site directly, that site is likely acting as a broker. Purchasing through a broker is the default option. The bottom line is that pricing should be consistent across plans, regardless if you use a broker.
Selecting a Health Plan
There are a number of factors to consider when selecting health plans for your employees. What kind of health insurance to offer also depends on your company’s location. Health insurers sell plans regionally – often in a city or metropolitan area, because most health care providers (hospitals and doctors) only operate in specific regions.
In addition to what hospitals and doctors will be included in your insurance plan, you will also look at what co-payments (out-of-pocket fees for a visit or prescription) are required when seeing doctors and specialists, what the deductibles (out-of-pocket costs for procedures and services before insurance coverage kicks in) are if any, and the cost of the plan.
Most popular health insurance brands like Aetna, Anthem, Blue Cross, Cigna and United Healthcare offer multiple plans in each geography (i.e. gold, bronze, silver). These plans will have different costs depending on the level of coverage they offer. Plans with lower or no deductibles, lower co-pays and broad networks of hospitals and doctors will have more expensive insurance premiums than those with high deductibles, higher co-pays and narrower networks.
Your broker will be able to get you a quote from multiple insurance companies across multiple plan types. The quotes will be based on the demographics of your employees, such as age and gender. Most plans are priced per employee per month.
If you chose a widely-known plan with a broad network for your startup, it typically makes sense to only offer one plan choice to employees given the likely small size of your employee pool and the administrative burden of supporting multiple plans.
1) Geography matters: Many healthcare providers only operate in specific regions
2) Cost: Research what the co-payments, deductibles and plan costs are
3) Tiered plans: Healthcare providers offer multiple plans (i.e. gold, bronze, silver)
4) Quotes: Compare healthcare plans and cost by receiving quotes from various insurance companies
5) Employee offering: If you have a small employee pool, it makes sense to only offer one plan choice
What additional types of insurance to offer
Besides health insurance, many startups offer dental and vision insurance. If you would like to be more generous with benefits, you could also offer life insurance and other insurance that covers employees in the event of serious health complications, which is known as Supplemental insurance. Aflac is a provider of these types of insurance. In general, these are coverages startups can add over time, but health, dental and vision should be sufficient to attract talent.
How much of the insurance premium will your company cover on behalf of employees?
There is no obvious right answer to this question, but the safest option in terms of attracting talent is for your startup to cover 100% of employee premiums. If you are recruiting employees from top companies, they are likely coming from organizations that cover 100% of employee premiums. That said, some employers take the position that it is better to ask employees to pay for a modest amount of the premium, so that employees pay more attention to the benefit and may even appreciate it more. Regardless, a good benchmark is to cover somewhere between 80% and 100% of employee insurance premiums.
"The safest option in terms of attracting talent is for your startup to cover 100% of employee premiums"
How much of the insurance premium for dependents (children, spouses, domestic partners) will your company cover on behalf of employees?
With regards to dependents, there is less expectation in the marketplace that these premiums will be covered, so it is more standard practice to cover somewhere between 75% - 90% of dependent premiums. One thing to keep in mind is that if you offer a generous dependent plan, spouses of your employees may migrate to your company’s offering if it saves their family money.
Brex founders initially had health insurance via their student insurance plan while enrolled at Stanford. However, once the first two employees arrived at Brex, they sought insurance via its payroll vendor, Gusto. However, Gusto benefits product requires you to have five or more employees.
Instead, Brex turned to a local insurance broker that was recommended by one of its employees who had worked with them previously. Brex offered only one health plan, an Anthem Platinum plan with no deductible and a $20 primary care co-pay. For dental coverage, Brex offered Beam Dental insurance, which includes an electronic toothbrush kit as an onboarding gift for new employees. For vision coverage, Brex went with VSP / Co-Power.
Brex health, dental and vision insurance premiums are completely covered for employees, and are 80% covered for dependents.